When you think of Macy’s, you probably picture Santa Claus, a Thanksgiving Day parade, or its eleven-story, 2.2-million-square-foot flagship location in Manhattan, once known as the world’s largest store.

But that wouldn’t be an accurate picture of the U.S. retailer. In recent years, Macy’s has turned into a digital hybrid nearly as familiar with GPS signals and online advertising as it is with clothes racks and perfume counters. According to its annual report, it’s now “an omnichannel retail organization operating stores and websites.”

“Omnichannel” is a buzzword that describes a survival strategy. Threatened by the growth of low-cost online merchants, traditional retailers are reacting by following customers onto the Internet. Macy’s does it as well as any. On its website, it installs 24 different tracking cookies on a visitor’s browser. On TV, it runs ads with Justin Bieber that urge millennials to download its mobile app, which tells them which of the chain’s stores is closest to their location. Once inside, they can use the app to scan QR codes on a pillowcase or a pair of shoes. Online orders now ship from the backrooms of 500 Macy’s stores that this year began acting as mini distribution centers.

So what’s online and what’s offline? And does it matter anymore in retail? These are the big questions behind this month’s MIT Technology Review Business Report. “Getting into data, analytics, or mobile isn’t even a decision anymore, so we should stop calling it e-commerce and call it just commerce, or maybe pervasive commerce,” says Chris Fletcher, a research director at Gartner who works with retailers. “It’s happening and you have to deal with it. But companies are just getting used to the idea that it’s all one experience.”

According to the U.S. Census Bureau, which tracks economic data, only 5.2 percent of U.S. retail purchases were made online in 2012 (13.1 percent if you don’t include gasoline, groceries, or automobiles). So in-person sales still dominate. But these figures underestimate the effect of the Internet. When stores like Best Buy survey their customers, they find that 80 percent of them have already searched for price information online. A third of them do so on a phone while inside a store.

Coloring the situation is just how badly most large merchants misjudged technology. Back in 2008, Accenture found that retailers invested only 2 percent of their revenue in technology while most other industries invested two to three times that much. As they stood by, Amazon.com has amassed annual sales of $60 billion, six times the online sales of its nearest U.S competitor, Walmart.

With its thousands of engineers, Amazon is starting to look like a software company that just coincidentally sells things (see “No stores? No Salesmen? No Profits? No Problem for Amazon”). But now it and other Internet companies, including eBay and Google, are investing in same-day delivery—getting goods to people just hours after they order them. With their drop boxes and fleets of delivery cars, they’re bidding to eliminate one of physical retailers’ main advantages: immediate gratification.

Traditional chains are running in the opposite direction. They must reach customers on social media, on the Web, and on their phones (see “The Internet Killed Distance, Mobile Computing Brought it Back”). But their stores—often thought of as a costly liability—may turn into an advantage. One emerging technology is indoor mapping, which enables retailers to capture customers’ cell-phone location while they’re browsing. With Wi-Fi sensors and even video surveillance, chains may be able to do the same kind of behavioral advertising that’s possible on the Web. Imagine them, for instance, sending a timely coupon to that shopper circling the outdoor grills in Aisle 6 (see “Stores Sniff Out Smartphones to Follow Shoppers”).

“Retail has become a blur. And the blurring is 100 percent driven by technology,” says Tige Savage, a partner at AOL founder Steve Case’s investment company, Revolution, which is investing in new online retail startups. “Are you at the store? Or is the store at you? And then there’s mobile, the store is in your pocket. The game is to satisfy demand wherever and whenever it is.”